In the broad sense of the word, “financial technology” is any technology aimed at improving and automating providing financial services. Their main task is to make it easier for large companies, business representatives and end-users of services to work with their own finances. This is making through specialized software, both on computers and smartphones.
The term first appeared at the beginning of the XXI century, but then “fintech” referred primarily to the technologies used by large financial institutions. However, it soon became clear that the scope of their use could be expanded to ordinary consumers of various financial services. At the current moment, financial technologies have entered into the majority of segments and sectors of the financial industry, as well as in the fields of education, retail, fundraising, investment and a number of other areas of human activity.
The fintech also directly concerns the cryptocurrency sphere. However, these are mainly “informational occasions”, and the main base of financial technologies is still tied to working with the traditional banking sector with its multi-billion dollar market capitalization.
Why is this even needed?
Initially, fintech dealt exclusively with computer technologies used in the back-end of large banks and trade missions. However, with the proliferation of Internet technologies, this phenomenon has spread to the sphere of personal finance.
As an example, we can cite the following situations: money transfers, payments using a smartphone, various workarounds for bank checks during applying for a loan, platforms for raising funds to launch a new business, and much more. According to EY's 2017 Fintech Adoption Index, approximately one-third of humanity uses two or more financial technologies in their lives and recognizes them as extremely important and useful.
Almost all well-known and actively-funded fintech startups have one thing in common - they challenge traditional financial service providers. And quite successfully, since new developments either focus on underserved segments, or work with the "old" ones, but more deftly, quickly and efficiently. The following projects can be cited as illustrative examples.
- Affirm. This application allows you to untie online purchases from credit cards. What for? So that negative credit history and high-interest rates do not interfere with the process. The application provides short-term purchasing loans on a general basis.
- Better Mortgage. Optimization of mortgage lending by eliminating brokers' mediation. This application allows you to get "prior approval" within 24 hours after application.
- GreenSky. Facilitates obtaining loans to improve housing conditions. Lower percentages, zero “promotional periods”.
- Tala. The application works in developing countries and makes it easier for users to obtain microloans. Even in the complete absence of credit history and special data on the use of finance. Offers more effective proposals than local banks and microfinance organizations.
- Credit originator Upstart. An application that allows you to collect more effective data on the creditworthiness of a person than the traditionally used FICO index. Which, often, is “internal banking information” and is not disclosure subject.
For a long time, traditional financial institutions were the only providers of mortgages, loans and other similar services. That means, they did everything at once. Fintech allows you to focus on individual services and make them more efficient, reducing the main possible costs and optimizing existing rules and algorithms.
We can say that these technologies really destroy traditional ideas about financial issues, moving the entire process from banking branches to consumer smartphones. And here are some excellent examples that confirm the effectiveness of this approach:
- Robinhood. A mobile stock trading application that does not charge transaction fees.
- Prosper Marketplace, Lending Club and OnDeck. Sites engaged in peer-to-peer lending and allowing to significantly reduce loan rates due to competition.
- Kabbage, Lendio, Accion and Funding Circl. Platforms that allow startups to collect working capital.
- Oscar. Online Insurance Startup. Only in 2018, he received funding in the amount of $ 165 million.
The traditional banking sector could not help but respond to such intense competition, so many large banks also began to invest in the development and adaptation of financial technologies to their own needs. A good example is the investment bank Goldman Sachs, which opened its own Marcus consumer lending platform in 2016. The project turned out to be so successful that it even managed to expand to the territory of Great Britain, known for its strict systems of regulation of financial relations.
However, most experts believe that traditional banks are not investing enough in new technologies. Anyway, it is not enough just to increase funding for certain areas of activity - you need a major change in thinking and a rejection of traditional approaches and decision-making processes that are the main characteristic of corporate structures.
The use of machine learning and artificial intelligence technologies will help optimize behavioural analytics and marketing. This can be realized by creating special “training applications” that will help the company collect important data, and users - to improve the decision-making process on costs and savings.
In addition, these technologies will optimize chatbots and voice interfaces that are responsible for customer service. This will significantly reduce staff costs and increase capacity. And in the security sector this can be useful - the automation will track transactions atypical in size and purpose in order to identify potentially fraudulent schemes.
Numbers and main directions
Among the most promising areas of activity of fintech projects are the following:
- Cryptocurrency. The fastest-growing segment of the digital market.
- Blockchain in general and Ethereum-based projects in particular.
- Applications running due to smart contracts (automatic fulfilment of obligations between buyers and sellers subject to predefined conditions).
- Open banking concept. In short - the ability to connect a third party to work with banking information. Previously, this was a matter exclusively between the bank and the user.
- Simplification and optimization of the insurance industry.
- Streamlining regulation to counter money laundering and anti-fraud.
- Automation and optimization of investment advice.
- Work with low-income people with whom the traditional banking system refuses to cooperate.
There are 4 main categories of fintech users:
- Large banks
- Business customers of large banks
- Small business
Further development of mobile banking, more efficient exchange of information, automated analytics and decentralization of applications will be beneficial for all of these groups.
It will be easiest for consumers, especially for the younger generation. The so-called "millennials" are not only easy navigates in digital technology, but also have high monetary potential. And fintech will help to implement it more efficiently. But the older generation may have some difficulties. Including because it has different requirements and expectations for finances, weakly correlating with the capabilities of financial technologies.
The financial sector is one of the most actively regulated areas of human activity. Therefore, the intervention of new financial technologies in it has become the number 1 problem for the governments of many countries.
The simplest example is a liability in cases of force majeure. If a bank was hacked and money was taken from your account, you can sue a bank that did not provide sufficient protection of funds. And if the same thing happens within the framework of a decentralized financial application? Who will file a lawsuit and who will answer? And if a banal leak of personal data occurs from such an application? So far, most regulators do not have a clear answer to these questions.
There are more complicated situations when the possibilities of financial technologies begin to directly contradict local legislation. A typical example is a Zenefits startup based in San Francisco that deals with insurance. As it turned out, it violated California laws prohibiting unlicensed brokers from selling their products and issuing policies. Total - a fine of $ 980 thousand for breaking the law and an additional obligation to pay the Department of California State Insurance $ 7 million.
Even with fundraising platforms, things are not so simple. The latest development in the field of cryptocurrencies - “Initial Coin Offering”, which allows you to collect funds from non-core investors, immediately attracted the attention of fraudsters. You can promise a lot, get an investment, and then get down with money. Anyway, the technical mechanisms that impede such a scenario are under development.
And, of course, the collection of personal data with the potential for its further misuse. In the European Union, Japan and South Korea, the process of developing rules regarding this issue is currently underway.
Further development of financial technology is a settled issue. But their interaction with traditional financial and legal institutions is still not there. And it is precisely on this issue that the main attention will be focused in the near future. And in parallel with this - there will be a more active introduction of fintech in ordinary life. Moreover, not only among residents of developed countries but also almost everywhere.